Vodafone Idea Not Liable To Deduct TDS On Discount Allowed To Distributors On Purchase Of Prepaid SIM Cards And Recharge Vouchers: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that Vodafone Idea is not liable to Deduct Tax at Source (TDS) on the discount allowed to the distributors on purchase of prepaid SIM Cards and recharge vouchers. The Bench of Vikas Awasthy (Judicial Member) and M. Balaganesh (Accountant Member) held that since the relationship between the assessee Company and the distributors was only that of a principal to principal and not that of a principal to agent, therefore, the assessee was not obligated to deduct tax at source in terms of Section 194H of the Income Tax Act, 1961. The Tribunal added that since the profit margin earned by the distributors was not determinable by the assessee, it had no obligation to deduct TDS on the discount offered to the distributors. Hence, it ruled that the legal maxim "Lex Non Cogut Ad Impossiblia", i.e., "law cannot compel a person to perform an act which he could not possibly perform", was attracted in the case. During the course of assessment proceedings, the assessee- M/s. Vodafone Idea Ltd., was asked to submit details of commission and discount given to dealers and the tax deducted on the same. The Assessing Officer (AO) observed that the assessee had deducted tax at source (TDS) for the commission payments made to the distributors but it had not deducted tax for the discount allowed to them. The assessee Vodafone Idea submitted before the AO that it appoints distributors who purchase prepaid SIM Cards and recharge vouchers in bulk at a discounted price from the assessee, which they further sell to the sub-dealers or retailers. The assessee averred that the distributors were free to sell the prepaid SIM Cards and recharge vouchers to any retailer at any price which the distributor decided, subject to maximum retail price (MRP), and that no control was being exercised by the assessee company on the distributors. Therefore, contending that there was a principal to principal relationship between the assessee company and the distributors, the assessee submitted that the discount given to the prepaid distributors was not subject to TDS. Further, it averred that since the entire payment was received by the assessee from the distributors in advance, the provisions of Chapter XVIIB of the Income Tax Act warranting deduction of tax at source were not attracted. However, the AO opined that the discount given by the assessee to the dealers / distributors was in the nature of commission, on which TDS should have been deducted by the assessee under Section 194H of the Income Tax Act. Therefore, the AO disallowed the discount given to prepaid distributors under Section 40(a)(ia) of the Income Tax Act. Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)), who upheld the order of the AO. The assessee challenged the order of the CIT(A) before the ITAT. Perusing the distributors agreement, the ITAT noted that the distributors made payment of the discounted price in advance to the assessee and that there was no payment of any kind made by the assessee to its distributors. Further, the Tribunal observed that the distributors earned income only if the said SIM cards and recharge vouchers were sold further. While ruling that there was no fixed amount of commission that could be determined from the distributors agreement, the ITAT held that if the amount of commission income that could be determined in the hands of the distributor is not permissible, there can be no obligation on the assessee to deduct tax at source. "As stated supra, the distributors earn income only when the said sim cards and recharge vouchers were sold at a price higher than its purchase price (i.e. the price paid by the distributor to the assessee herein). Hence, it is highly impossible to determine the amount of income that would accrue to the distributor on which tax ought to have been deducted by the assessee u/s.194H of the Act. Hence, the entire TDS computation mechanism fails in this case", the ITAT said. The Tribunal observed that the distributor is allowed to distribute the SIM Cards and the recharge vouchers to its retailers at any price between the consideration paid to the assessee and the MRP fixed by the assessee. However, the distributors earned income only when the said SIM cards and recharge vouchers were sold at a price higher than the price at which they were purchased from the assessee company. Hence, the ITAT ruled that the assessee could not be expected to determine the profit margins that could be derived by the distributor so as to accordingly deduct tax at source. While noting that it was likely that the distributors may not be able to sell the prepaid SIM cards and recharge vouchers, the ITAT added that in the said case there would be no income that would accrue to the distributors and hence, there would be no question of deducting ...

Vodafone Idea Not Liable To Deduct TDS On Discount Allowed To Distributors On Purchase Of Prepaid SIM Cards And Recharge Vouchers: ITAT

Parina Katyal

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